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TRC Blog

December 01 , 2010

Discipline

 December 1st, 2010 
By Steven A. Lieberman & Alan P. Shor
The U.S. is starting its long climb out of a deep recession. Consumer confidence is on the rise, unemployment rates are slowly dropping, and consumer spending is on the general uptrend. Now that we are beginning to regain some of our footing—especially in real estate—we are starting to see several new opportunities. It is times like these where, more than ever, discipline is of the utmost importance to any real estate decisions. Discipline is one of the most important fundamentals behind fully maximizing opportunities, and our focus has always and will continue to be to maximize opportunities for our retail clients. This principle is what makes a market like the current one so exciting.

While retail real estate will power up the economy, ultimately it is the consumer that will determine the pace of the U.S. recovery, and there continues to be positive indicators. The “fear factor” that began to dominate consumer’s decisions in 2008 when massive layoffs occurred has receded significantly over the past 24 months. After peaking at 10.1% in October of 2009, the U.S. unemployment rate has slowly moved downward and now stands at 9.6%--8.4% for those of us in Dallas, and 8.8% in Houston. Personal savings rates are decreasing as consumers are beginning to save less, spend more and start borrowing again.

Retail occupancy rates are expected to edge down slightly from 87.6% in the fourth quarter of 2009 to 87.3% in the same period of 2010. We believe 2011 will be at a similar level. Further, average retail rentals are forecasted to decline 2.4% in 2010, after a drop of 4% in 2009. Net absorption of retail space looks to be a negative 3.4 million square feet this year, well under last year’s negative 4.5 million square feet.

Commercial property will follow the economy’s lead. As consumer confidence builds, so will many real estate asset markets, especially retail. With more jobs comes a need for commercial space, and retailers are beginning to expand again. In Texas, we have seen strong traction this year with TRC’s Q3 YTD transaction volume up 61.8%, and we continue to see more tenants gearing up to sign leases in 2011 and 2012. There is a growing confidence in the markets, and financing is beginning to thaw for the right projects. Those projects will be the ones that balance opportunity with discipline.

The retail landscape is much improved, and moderate growth is most likely through the end of 2010 and into 2011. Reflecting an expanding economy since late last year, same-store sales were on upward trajectory in the first quarter of 2010, but as the second quarter ended, things began to flatten out. We saw another uptick in August due to heightened consumer confidence, but that slowed again going into September. While retail sales will improve as we enter the holiday season, it is important to be realistic about what could happen in overall sales figures between now and the end of the year. There are many signals that consumer confidence and overall spending are slowly moving back to a “new normal” and stabilizing through the end of 2010 and into 2011.

Texas is one of the country’s strongest markets, and by focusing on the major metropolitan markets in Texas and the surrounding states, The Retail Connection continues to insulate our business from volatile environments found elsewhere in the country. With a strategy to add value to a disciplined approach and a willingness to exit timed for maximum returns, TRC is poised to take advantage of the opportunities presented by a steadying real estate market.

Opportunities to trade retail properties are going to accelerate—many properties are challenged and looking for solutions. The key is having the relationships and knowledge of the retail market to pursue the right opportunities, manage risk and return the greatest value. This is the controlled approach that defines us and allows us to continue to gain market share, expand our business, and best serve our clients.

The market is as interesting and exciting as ever, with more dynamics at play than we have seen in years. This has led to huge activity; however, you cannot confuse motion with progress. At the same time, you cannot have progress without motion. The current activity is everything from positive to concerning, particularly the “kicking of the can” toward resolving the challenges associated with the unprecedented amount of commercial debt that is coming due. These are definitely interesting and exciting times with a tremendous amount at stake. They will create unprecedented challenges and opportunities over the next five years. Those opportunities will provide momentum to move forward, but only if they are made deliberately and with focus. Capital, knowledge, and relationships are and always will be critical; however, creativity and discipline will be imperative to winning equations and optimal results. 

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